Conflict Minerals Rules Could Reverberate Through Supply Chain

A fighter of the Mai Mai, the collective group of paramilitary combatants claiming to defend particular ethnic communities in Congo.

New rules for conflict minerals have been in the works for a long time, but much of the impact on manufacturing supply chains has yet to be felt.

On the face of it, the rules, which require companies to trace the origin of specific minerals from central Africa, appears to apply to a relatively small number of companies. The Securities and Exchange Commission identified about 6,000 listed companies directly affected by its rules, which require vetting of the use of tin, tantalum, tungsten and gold. The idea behind the rule is that these metals are used by genocidal groups in the Democratic Republic of Congo and surrounding countries to finance their operations.

These listed companies will have to follow a three-step process to verify and attest to these metals coming from reputable sources. But there is also a knock-on effect on suppliers to those listed companies.

“They’re going to push it down into their supply chains,” said George Wang, a partner at Haynes & Boone.

The National Association of Manufacturers made this point in a letter to the SEC dated Aug. 1, ahead of the release of the final rules on Aug. 22: “…when issuers seek to establish that their supply chains are free of conflict minerals, they will have to turn to their first-tier suppliers and require due diligence. Those suppliers will turn to their suppliers, and so on throughout the supply chain.”

Ahead of the rules, various industry associations pointed to the complexity of their industry’s supply chains, which can run to multiple layers between the original mining of a material and its final use in a product.

The NAM said each issuer would have between 2,000 and 10,000 first-tier suppliers. Kraft, the food giant, has estimated that it uses 100,000 suppliers.

These suppliers will have to provide their listed partners with reports on their sources of materials. The SEC is requiring listed companies to have good reason to trust a supplier’s account of its compliance with the conflict minerals requirements. That could come via a “conflict free” designation from an industry group or an independent audit.

Wang said public companies may seek indemnification from their suppliers against the risk of information they have supplied not being inaccurate. “The smart issuers will specifically ask for it,” he said, though others may already have such protections in their contracts.

From the suppliers’ point of view, he said, some private companies may decide to give up such business rather than bear the cost.

It’s also worth noting that the rules come on top of a raft of other laws and rules around the world that require companies to dig into their supply chains to eradicate slavery, human-trafficking and child labor. KPMG has a useful diagram of these.

The article indicates that the SEC has identified about 6,000 companies directly affected by its rules. Do you mean that the SEC has indicated there may be 6,000 companies affected or has it actually identified those companies by name? If it has identified those companies by name, then where is this SEC identification of companies found?

About Corruption Currents

Corruption Currents, The Wall Street Journal’s corruption blog, digs into the ever-present and ever-changing world of corporate corruption. It is a source of news, analysis and commentary for those who earn a living by finding corruption or by avoiding it. Corruption Currents is written by Christopher. M. Matthews and Sam Rubenfeld and edited by Nick Elliott.

Some posts in Corruption Currents are free but others, denoted by a key symbol, require a subscription.